Most superannuation account balances are highly dependent on the performance of shares. Australian and international shares receive the biggest allocation from most of the so-called "balanced" investment options. These are the options in which most of us have our retirement savings.
Many years ago, these "balanced" options were balanced between asset classes but they loaded up on shares when markets were booming to maximise returns, leaving investors exposed when markets turned ugly.
Researcher SuperRatings says the median-performing balanced option returned 7.5 per cent over the year to June 30. At more than four percentage points above inflation, that's good. But sharemarkets remain skittish.
Since April, the Australian sharemarket has fallen by more than 8 per cent and international shares are down about 5 per cent over the same time, SuperRatings says. With the ongoing concerns about the European sovereign debt crisis, investors are still risk-averse and staying away from shares. In the past five years to June 30 this year, the median-performing balanced investment option had an average annual return of just 2.2 per cent.
As our mostly privatised super system has not served us that well, it's worth considering whether a public system would have done any better. The Future Fund is probably the closest proxy to what we would have had if we had a public super system. The Future Fund was established to fund the pension liabilities of retired public servants.
The Future Fund has been going only since May 2006 but to March 31 this year (the latest available data), the average annual return was 5.3 per cent. That excludes the fund's Telstra holdings, which, if included, would lower the returns. Telstra shares are excluded from the Future Fund's performance because it was given Telstra shares by the government after the telco was privatised.
The five-year periods over which the performances of the Future Fund and balanced investment options are being lined up against each other do not match exactly but they are close. The Future Fund's average annual return of 5.3 per cent is more than twice the return of 2.2 per cent for the balanced options.
The Future Fund's return is particularly good given the five-year period includes the global financial crisis.
The asset allocation of the Future Fund is what most people would probably consider "balanced". Whereas most "balanced" investment options have about 70 per cent of the money invested in shares and property, the Future Fund has about 45 per cent in shares and property, with the rest in alternative assets, debt securities, cash, private equity and infrastructure.
It's worth remembering most fund members are free to choose any super fund they wish, including one that has a more conservative investments spread to the one they are likely to be in now.
Frequently Asked Questions about this Article…
What is a 'balanced' superannuation option and how does it invest?
A balanced superannuation option is a mix of asset classes meant to deliver moderate growth with some risk control. Traditionally these options hold large allocations to shares and property (around 70% in many funds), with the rest in fixed income, cash and alternatives, though allocations vary by fund.
Why are most superannuation account balances highly dependent on shares?
Most super funds put a big proportion of their 'balanced' portfolios into Australian and international shares, so the performance of sharemarkets strongly drives overall super balances. When shares rise, balanced options tend to do well; when shares fall, members can see their account balances decline.
How did median-performing balanced super options perform over the year to June 30?
Researcher SuperRatings reported the median-performing balanced option returned 7.5% over the year to June 30, which the article notes is more than four percentage points above inflation for that period.
How have share markets moved since April and what does that mean for super balances?
According to SuperRatings cited in the article, since April the Australian sharemarket has fallen by more than 8% and international shares are down about 5%. Because balanced options are heavy in shares, those market falls can reduce short-term super balances and keep investors cautious.
What is the Future Fund and how has its performance compared with typical balanced super options?
The Future Fund is a public fund set up to help meet pension liabilities for retired public servants (started in May 2006). To March 31 (latest data in the article) it delivered an average annual return of 5.3%, which the article says is more than twice the five-year average annual return of 2.2% for median-performing balanced options over a similar period.
Why are Telstra shares excluded from the Future Fund’s reported returns?
Telstra shares were given to the Future Fund by the government after Telstra was privatised, so the fund excludes those holdings when reporting performance; the article says including Telstra would lower the Future Fund’s reported returns.
How does the Future Fund’s asset allocation differ from most balanced super options?
The Future Fund’s asset mix is described as 'balanced' but is lighter in shares and property—about 45%—and allocates the remainder to alternative assets, debt securities, cash, private equity and infrastructure. By contrast, many balanced super options have about 70% in shares and property.
Can I choose a more conservative super fund if I’m worried about share market risk?
Yes — the article reminds readers that most fund members are free to choose any super fund or investment option they want, including more conservative options with lower share exposure if they prefer less volatility in their retirement savings.
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